How Trump’s budget helps the rich at the expense of the poor

The Trump administration is expected to introduce its 2018 budget proposal on May 23, which will likely include major cuts to programs for low-income Americans. (Jenny Starrs/The Washington Post)

For President Obama, the gap separating rich and poor Americans was, as he put it in a speech in 2013, “the defining challenge of our time.” He and his administration labored against Republican opposition and stubborn economic realities to shrink that disparity for eight years, making reducing inequality a central goal of national policymaking.

Despite those efforts, the United States remains among the most unequal developed countries, and on Tuesday, President Trump decisively abandoned his predecessor’s attempts to narrow inequality.

To the contrary, the policies described in his first comprehensive federal budget would add to the incomes of the rich, while taking away from the poor.

“It’s just the complete obverse of what Obama was doing,” said Jared Bernstein, who was chief economist to former vice president Joseph R. Biden Jr. “These folks seem to look at the economy and conclude that the wealthy don’t have enough and the poor have too much, and they’re going to fix that.”

Trump announced a tax overhaul that would reduce or eliminate trillions of dollars in taxes that are paid primarily by the wealthy, including the estate tax and the marginal rate on ordinary income paid by the richest taxpayers. He would lessen spending on Medicaid, the federal program that provides health insurance to the poor, by $1.4 trillion over a decade, and he would allow states to impose strict limits on other major anti-poverty benefits such as food stamps.

The budget also called for repealing President Obama’s health-care reform, which helped cover poor and middle-class households with funds raised in part through greater taxes on the rich.

Republicans argue that Obama’s emphasis on the differences between rich and poor was misguided, and that policymakers should instead try to improve the fortunes of Americans across the board.

“I’m not really concerned about how many billions billionaires have,” said Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush.

Defenders say that the budget will help all Americans by lifting economic growth. While economists on both sides of the aisle are skeptical about whether the imagined growth rate of 3 percent or above is possible, White House budget director Mick Mulvaney dismissed that skepticism in a briefing with reporters on Monday.

“That assumes a pessimism about America — about the economy, about its people, about its culture — that we're simply refusing to accept,” Mulvaney said.

“If you are a 30-year-old adult, you have never had a job in a healthy American economy,” he continued. “You’ve either been in a recession or sluggish recovery, and you think this is normal and we are here to tell you it is not.”

In any event, Trump’s policies would almost certainly add to economic inequality — which is already at historically elevated levels.

Half a century ago, in 1967, the richest one in 100 American households claimed 11 percent of the income generated by the whole U.S. economy that year. That figure had doubled to 22 percent by 2015, the latest year for which data is available, according to research by economists Thomas Piketty and Emmanuel Saez.

The data on wealth — that is, the savings, securities, property and other assets owned by households as opposed to the income they receive in a given year — is even more striking. Saez and his colleague Gabriel Zucman have calculated the richest 0.1 percent of U.S. households alone now own about as much as the poorest 90 percent of the country combined. That discrepancy has not been so severe since the Great Depression.

Zucman, an economist at the University of California at Berkeley, attributed the increase in inequality in part to President Reagan’s reductions in marginal rates paid by the rich. Zucman said that those reductions had failed to yield improving standards of living for Americans of middling incomes.

“The U.S. has run a big experiment,” Zucman said. “It has failed in the most spectacular way.”

During the Obama administration, the federal government intervened to check the increase in inequality. In Obama’s first term, the government was doing more to even out Americans’ incomes than it had been at any point in the previous 40 years, the nonpartisan Congressional Budget Office found.

That shift was in part a result of Obama’s policies. Obama allowed President Bush’s tax relief for the richest Americans to expire, and made more federal assistance available to the poor and the working class through Obamacare.

At the same time, some of the change was due to programs that had been in place long before President Obama was elected. For instance, more Americans turned to food stamps and unemployment insurance after the financial crisis began during President Bush’s last year in office.

Piketty, Saez and Zucman’s most recent research suggests that federal policies had maintained a check on inequality through 2014, but whether the gap has widened again since then is unknown. While Obamacare has provided greater benefits to the poor and the middle class, the economy has picked up as well, which tends to benefit the wealthy disproportionately.

“Because some of the underlying forces for inequality are so strong, it’s an achievement to keep inequality flat,” said Richard Reeves, the author of a forthcoming book on inequality, “Dream Hoarders.” “It does mean that the engine of redistribution has to be working harder in order to stand still.”

Jason Furman, who was CEA chair under Obama, described anti-poverty programs not just as a form of temporary relief. Rather, he said, public benefits give the poor the means to invest in themselves and their children through better nutrition, schooling and more, improving their economic prospects over the long term.

“The academic evidence is increasingly finding that these programs don’t just help people in the short run,” Furman said. Reducing their budgets, he warned, “will keep more people trapped in poverty.”

Trump's budget would bring down spending on food stamps by $191 billion over 10 years and cut $21 billion from Temporary Assistance for Needy Families, the federal cash welfare program. Those are "scorched-earth" retrenchments, said William Hoagland, who served as former Sen. Bill Frist's (R-Tenn.) budget director.

"That is huge. That is humongous. That is really out of kilter," Hoagland said, referring to the reduction of $1.4 trillion for Medicaid. "It is one of the more right-wing-type budgets that I’ve ever experienced."

Hoagland argued that Trump's decision not to reduce spending on Social Security or Medicare forced his aides to propose extreme reductions in federal benefits for the poor in order to achieve a semblance of fiscal responsibility. Those two programs for the elderly are popular, but cutting back on benefits would allow for a fairer budget overall, Hoagland said.

Douglas Holtz-Eakin, a conservative economist and former director of the Congressional Budget Office, agreed. "If you take off the table the two major entitlement programs, you can’t possibly address the budget problems in a sensible way," he said.

Trump proposed some new benefits for ordinary Americans. He put forward a parental leave plan, which would grant many U.S. workers six weeks of paid time off following the birth or adoption of a child. During the campaign, Trump became the first Republican presidential nominee to take on the issue of parental leave.

The president’s advisers have said that he will reduce taxes on some middle-class households by increasing the standard deduction, which would most likely benefit people who live alone and small families. Meanwhile, they have said that Trump will not reduce taxes on the rich, saying that other, still unspecified hikes in taxes will cancel out the generous tax relief for this group that Trump has already put forward.

Trump’s allies also argue that his proposals will accelerate economic growth, and that middle- and working-class Americans will be better off even if their share of national income does not increase relative to the richest. The budget forecasts that under Trump’s policies, the pace of growth will soon accelerate to 3 percent annually from about 1.6 percent last year.

Independent experts suggested that Trump might not be able to reach that ambitious goal, even if all of his proposals were enacted.

“I do think it’s possible, but it’s aspirational,” said Hubbard, Bush’s CEA chair. For instance, he said that achieving more rapid growth would in part require expanding federal programs that pay low-income workers a bonus based on how much they earn. Hubbard said these programs, such as the Earned Income Tax Credit, encourage Americans who are not working to enter the labor market.

“If you don’t get on the ladder, you’re not going to climb the ladder,” he said. “If somebody is working full time, they ought to have a meaningful wage.”

Yet Trump’s budget would reduce spending on the Earned Income Tax Credit by about $40 billion over 10 years.

“It’s feasible, but it’s a big lift,” Holtz-Eakin said when asked about the goal of pushing annual growth to 3 percent.

He added that Trump’s goals of imposing new restrictions on immigration and international trade could hamper the economy. “I don’t think all the things that they’re proposing go in the right direction,” Holtz-Eakin said.

Berkeley’s Zucman described Trump’s plans as an extension of Reagan’s approach. “If we double down on these past policies, inequality could really reach extreme and totally unprecedented levels in the years ahead,” Zucman said.